Where to invest now

Kiplinger's Personal Finance Magazine, Jan, 1998 by Manuel Schiffres

In all but the shortest maturities, high-bracket taxpayers will find the pickings much more attractive in tax-free municipal bonds. Steven Narker, a muni-bond expert at Merrill Lynch, says the sweet spot of the tax-free yield curve is at about 15 years. Fifteen-year bonds collect some 95% of the yield of 30-year muni bonds, but are much less volatile. A 15-year, A-rated municipal recently yielded 5.2%, which would be equivalent to a taxable yield of 8.7% for a taxpayer in the 39.6% federal tax bracket and to a taxable yield of 7.6% for someone in the 31% bracket. That compares with a recent 6.1% yield for 30-year Treasuries and a 5.9% yield for ten-year Treasuries.

For income-oriented, high-bracket investors, Merrill Lynch recommends investing 15% in one- to five-year maturities; 10% in five- to ten-year maturities; 35% in ten-to 15-year bonds; and the rest in 15- to 20-year issues for the muni-bond section of a portfolio.

DISASTERS STRIKES!

Since 1980 the rise in consumer prices has slowed from 13% a year to just over 2%. That's called disinflation, and it's good. But what if inflation were to go into reverse -- what if prices began to fall? That's called deflation, and it could punch a big hole in profits and derail stock prices. How? It goes like this: Factories in Asia churn out more and more goods to bolster their cratered economies -- more than consumers in the U.S. and Europe can buy. So do their competitors in the U.S. With a surfeit of goods, prices collapse. And those lower prices come right out of profits, both of the manufacturer and the retailer. And you know how much Wall Street hates falling profits. The odds of this happening are not great. And history shows that mild deflation can be good for stocks. But should consumer prices decline more than 2.5% or so, watch out below for falling objects.

SMALL UNDERVALUED COMPANIES

William Dutton, manager of Skyline Special Equities fund, has achieved a stellar record specializing in small, cheap stocks with decent growth potential. His best bets for 1998:

* Delphi Financial Group (symbol DFG, New York Stock Exchange, recent price $41) is an insurance company specializing in disability and worker's compensation. "The businesses are solid and growing," and the company is on the prowl for acquisitions. It should earn $3.70 per share in '98, up 12%.

* Finlay Enterprise (FNLY, Nasdaq, $23) operates leased jewelry departments in big department stores. Earnings should grow 19% in '98, to $2.15 per share, and could expand even more if the company refinances some outstanding debt.

* Internet (INMT, Nasdaq, $18) makes casting used in automotive and construction applications. New management has cut costs and is now working to increase revenues. Dutton expects profits to rise 23% in 1998, $1.90 per share.

* MagneTek (MAG, NYSE, $20), which makes electrical equipment, has a new boss who's turning the company around. Earnings -- which are expected to rise 31%, to $1.35 per share for the year ending June 30 -- could be well over $2 in three years. Meanwhile, the stock's price-to-sales ratio is a very low 0.5.